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September 27, 2013

What Makes a Successful Retirement Plan? Advisors Disagree

Advisor optimism up, clients still pessimistic

For the third-quarter Professional Outlook Survey, Russell Investments took a closer look at retirement income planning.

The report, released Thursday, found that one of the main challenges to planning is the way advisors measure success. It seems no one can agree on the best way to do that.

More than a third of advisors said they measure retirement plan success based on how much principal is preserved after distributions. Twenty percent said they look at the portfolio’s projected rate of return and 15% compare the current net present value of projected assets to liabilities.

Russell argued that the best way to approach the problem is for advisors to stay engaged with their clients. “The conversations around retirement income are important, ongoing and often require best guesses. That’s why quality analysis on the part of the advisor is so important,” the report says.

More than 80% of advisors say they’re using a total return approach for their clients, compared with just 7% who said they’re relying on dividends and interest for their clients’ income.

Interestingly, 12% of respondents said they had an “other” retirement strategy. Russell said respondents’ individual comments describing those strategies included bucket strategies, master limited partnerships, covered calls and a mix of yield-seeking strategies.

“Focusing on seeking yield might seem simpler, but it may not deliver the results clients need in the current low-rate environment. What’s more, reaching for yield in these low-yield times can be a dangerous exercise,” Russell noted in the report.

Mutual funds were by far advisors favorite product for retirement income, with 78% saying they had created a diversified portfolio of these funds for their clients. Almost half said they were using variable annuities and 48% used dividend-paying equity funds or dividend-paying stocks. About a quarter use bond funds or ladders.

In general, advisors are more optimistic about the economy than their clients are. More than 80% said they were optimistic about markets over the next three years, up from 75% last quarter. Their clients’ optimism, however, has remained relatively flat, dropping one point to 31%.

Furthermore, advisors said 37% of their clients had unrealistic expectations about their retirement. Two-thirds of those said their clients didn’t have a good picture of their spending in retirement and 55% said their clients didn’t understand how their spending today would affect their retirement. Nearly half said their clients were listening to nonprofessional sources that were giving them the wrong idea about retirement.

The topics advisors are discussing with their clients have remained relatively the same as well. Advisors are sticking to portfolio rebalancing (54%) and performance (38%) and running out of money in retirement (33%) in client meetings. Advisors also noted that more than half of clients are still worried about market volatility and government policies, and 46% are focusing on their portfolio’s performance.

“Conversations among advisors and investors have remained fairly consistent over the last several quarters. It’s possible that interest in global events could tick higher next quarter as events in Syria continue to unfold and Germany holds elections in September,” the report said. “We expect the markets to digest whatever happens, short of an all-out war, and move on. Our strategists don’t see a lasting market impact there.”